Tuesday, 30 October 2012

Standard and Poors released its latest update on home price movements across the U.S. this week. The CaseShiller 10-city home price composite index hit its lowest level since 2003. This brings overall American house prices down to levels that are starting to look like good values for a number of reasons.

First, mortgage interest rates are at record lows. That means that the cost of a mortgage payment has fallen even further from the peak than has the actual purchase price of a house. Based on 30-year mortgage rates, now under 4%, the cost of a monthly mortgage payment is lower than at any time since mid-1999 (principal and interest only, not counting insurance or property taxes).

Since the start of the Case-Shiller data in January 1987, home prices have still increased faster than inﬂation and than the increase in the price of rent. However, the decline in home prices has brought the cost of owning versus renting closer to the relationship that existed between them in 1987.

The real bargain in housing is for those who can obtain a signiﬁcant mortgage because mortgage payments are at record lows relative to rents. Every local market, indeed every property, has its own fair value. These nationwide data suggest, however, that there are abundant housing bargains available for those who can get the ﬁnancing.

What about paying in cash? The problem is that if interest rates rise, something that the Federal Reserve has promised us it will try to avoid until late 2014, house prices could come under renewed pressure as mortgage payments rise with interest rates. If you finance your purchase with a ﬁxed-rate, long term mortgage, you are effectively taking a short position in bonds. In that case, a rise in interest rates beneﬁts you as a ﬁxed-rate borrower, offsetting to some extent the risks to the value of your house.

Chairman, Gerald Appel has been directing the management of Investor assets for more than thirty-five years, during which time he has authored or co-authored more than fifteen books relating to investment strategies as well as numerous articles that have appeared in publications such as Barron’s Financial Weekly, Stocks & Commodities and Money Magazine. Mr. Appel’s books have been translated into five languages; two have received the coveted “Book of the Year Award” from Yale Hirsch’s annual publication, “The Stock Trader’s Almanac.” Mr. Appel has appeared ...--more-->